Will opening up FDI in retail open the flood gates? Will kirana stores have to shut down?

Top CEOs of multi-national retailers have been lobbying hard for a long time to open up FDI in multi-branded retail for a long time. Obama’s visit this week with his cabal is now touted as the tipping point for the government to change its mind. While there is salivation over the prospects of continuing western growth stories, that can only be sustained by the tremendous consumption growth in Asia, there is a bit of an underestimation of the barriers to this fruit and an overestimation, by the media and the nation of the powers of these multi-nationals.

Granted Wal-mart & Carrefour bring rich experience from China, where they have had to learn the very hard way, to be nimble, to adopt and be a local retailer that can serve as an alternative for the Chinese consumers. However, chances are, success in China does not guarantee immediate success in India – India presents slightly different challenges. Foremost, India is a democracy, which means things require consensus or majority, which can often take a long time to achieve.

The infrastructure such as roads, railroads, power sources that appear absolutely out of nowhere in China is likely going to take longer to achieve in India, which in turn is likely to impact efficiencies in the supply chain for retail businesses. Thirdly, the linguistic & cultural diversity is also going to present some interesting issues.

The domestic players including the Future, Reliance, Tata & Birla groups have indeed scrambled over the last two to three years to build and create a first mover advantage that will either make them an attractive partner or acquisition target or competitor. However, the likes of Reliance & Future group have so vastly diversified that it is hard to clearly identify what their core competencies are, if at all any. Both groups have formed partnerships in every category under the sun with as many multi-nationals as possible, some of whom haven’t really been successful in their home markets (Office Depot).

As annual reports seem to indicate, all of these businesses are far away from profitability. While they have likely started making investments in to the supply chains, it doesn’t take a lot of research to know that Reliance Fresh is hardly fresh. In fact, the one in Malleswaram stinks so bad in the summer, it probably needs a hygiene inspection. So is the case with the Heritage Fresh, which is slightly better from offering convenient locations – however, when it comes to fresh food, the business models are a bit away from competing with the traditional markets & mundis (farmer’s market).

So, what’s with the hoopla? – FDI in retail is the new toy that the wild eyed child bored with all other toys will want to talk about. Once the investments and likely consolidations/ corrections happen, then it is the long haul of going about driving real efficiencies in the supply chain, building business models and brands. Part of this effort requires appropriate lobbying of the agencies that will need to aid with the infrastructural development, the consolidation and massaging of the supply sources including the farmers, co-operatives and other middle men who unscrupulously control a lot of the supply and hence, the prices.

Will small businesses have to shut down?

This is the million dollar question to which everyone almost always thinks the answer is a straight yes. I think there is scope for a counter argument to this. The answer is also likely to vary by category – while luxury categories (which most kirana stores do not operate in) may expand the market, specific categories may see consolidation (electronics retail) and some see cannibalization.

The thing about an Indian mundi is that a series of shops with virtually no differentiation can share the business & still succeed by collectively becoming a destination for people to shop for their fresh food needs. While organized retail will likely bring differentiation with their marketing investment, they will still likely have to provide competitive service and prices that appeal to the same segment of the population that will shop at these mundis.

Organized retail needs several other things to succeed – for example, the likes of a “Dole plantations”, who is a single consolidated supplier for pineapples (and other fruits) across the US does not exist in India. Areas such as these will present opportunities for some of these entrepreneurs who are already in the business of procurement & reselling. Who does stand to lose & be disintermediated are the middle men, who don’t participate in value creation. Who may gain are the farmers, who are likely to see some of the benefit of the disintermediation trickle down to them.

Again, this is an area where NGOs and for-profit agencies can look to aid consolidation and ensure that the farmers do not continue to be taken for a ride by the likes of wal-mart, who are known for just that.

In summary, the opening of FDI is likely to be a hoopla in the near term, but with potential for industry wide changes & opportunities for the long term. More than likely, there will need to be a series of reforms and incentives that will have to be put in play by the government that aids growth of organized retail in a sustainable fashion.